Debt-to-Income Ratio (DTI) Calculator
What is the Debt-to-Income Ratio (DTI)?
The Debt-to-Income Ratio (DTI), sometimes called the "debt-ratio," is a personal finance measure that compares how much money you owe each month to your gross monthly income. Lenders use DTI to evaluate your ability to manage monthly payments and repay debts. It's a key factor in determining whether you'll be approved for a loan, and it also helps you understand your own financial health.
There are generally two types of DTI:
- Front-end DTI (Housing Ratio): This ratio compares your total housing expenses (rent or mortgage payments, including property taxes and homeowner's insurance) to your gross monthly income.
- Back-end DTI (Total Debt Ratio): This ratio compares your total monthly debt obligations (including housing expenses, credit card payments, student loans, auto loans, and other recurring debts) to your gross monthly income.
This calculator focuses on the **back-end DTI**, as it provides a more comprehensive view of your overall debt burden.
Why is DTI Important?
Lenders often use DTI to decide how much risk they would take by lending you money. A lower DTI generally indicates that you have more disposable income available to cover your debts, making you a less risky borrower. Different types of loans have different DTI limits. For example, mortgage lenders typically prefer a back-end DTI of 43% or lower, though some may go slightly higher depending on other factors.
Interpreting Your DTI:
- 35% or less: Generally considered good. You likely have a manageable debt load.
- 36% to 43%: Acceptable for many lenders, especially for mortgages, but you may need to improve your DTI to qualify for the best terms.
- 44% or higher: Considered high. Lenders may see this as a sign of financial distress, and it could be difficult to get approved for new credit.
It's important to remember that DTI is just one piece of the lending puzzle. Lenders also consider your credit score, employment history, savings, and the loan's purpose.
How to Calculate DTI Manually:
1. Sum up all your recurring monthly debt payments. This includes credit card minimum payments, student loan payments, auto loan payments, personal loan payments, and any other loans. 2. Add your total housing payment (rent or mortgage, including property taxes and insurance). 3. Sum up your gross monthly income (income before taxes are taken out). 4. Divide the total monthly debt payments (from step 2) by your gross monthly income (from step 3). 5. Multiply the result by 100 to express it as a percentage.